PANC 2014: Enforcement and Litigation

This, said David Levine, principal with Groom
Law Group, speaking at the “Enforcement and Litigation” session at the 2014
PLANADVISER National Conference on Tuesday, is due to retirement plan
practices’ growing size—and attorneys’ pursuit of deep pockets.

“You are on their radar,” Levine said. “We
all live in a land of fee disclosure now. In 2006, it was all about revenue
sharing. The claims have now changed. Before, no one knew what a retirement
plan’s fees were. Now, there is a focus on share classes, which ostensibly
should not be retail. Think of how the government went after Al Capone. He got
caught for not paying his taxes. You can get in trouble for not documenting
your due diligence and your processes.”

One of the biggest and most recent 401(k) fee
litigation cases against retirement plans is Tibble v. Edison International. At the end of August, the U.S.
Solicitor General filed an amicus brief asking the U.S. Supreme Court to
determine whether the 9th Circuit should have decided to grant Edison the Employee
Retirement Income Security Act (ERISA) six-year limitations allowance; the
lower court in the original case charged the plan’s fiduciaries with failing to
pursue cheaper share classes for three mutual funds, Levine noted. At the heart
of this case is the court’s finding that “Edison didn’t have the due diligence
on record to find another share class,” Levine said. “An open statute of
limitation could drag you, as an adviser, into the process.”

Of course, Levine said, “the diligence
process varies. If you are looking at the investments in a large plan, you
should be looking at them quarterly. The investment policy statement [IPS]
should be short, sweet and aspirational. Document why you chose a particular
share class, level of investments, fund with revenue sharing and your criteria
for the wash list. Fiduciary Benchmarks can be a great tool, or you can do an
RFP [request for proposals], use internal resources or turn to DCIO [defined
contribution investment only] providers.”

However, on top of this, retirement plan
advisers do not only need to select a benchmarking process, but also must justify
“how you evaluate and update your benchmarking tool, and why you use that
tool,” Levine said. “Minutes from the investment committee meetings should show
that you spent time and caution making these evaluations, that you considered
alternatives. Using words like ‘discussed,’ ‘evaluated’ and ‘options’ are some
of the strengths you can show. Don’t ever say ‘this could hurt the company’ or
‘cost the company,’” even though that may be implied.

Another major case is Tussey v. ABB Inc., in which the plaintiffs sued ABB and its
recordkeeper, Fidelity, claiming that revenue-sharing payments to Fidelity
breached the plan’s fiduciary duties. The District Court awarded a total of
$36.9 million against ABB and Fidelity, plus $13.4 million in attorneys’ fees.
The plaintiff’s attorney, Jerome Schlichter of Schlichter Bogard & Denton,
has told PLANADVISER that this suggests a win is on the horizon for another
pending petition, with the case citing Tussey.

“Schlicter is a controversial figure piloting
many class action fee litigation suits,” Levine said. Schlicter’s firm has
brought a long list of cases involving claims of excessive fees against other
companies, including Krueger v.
Ameriprise Financial, Gordon v. Mass
Mutual, Abbott v. Lockheed Martin,
Grabek v. Northrop Grumman and Spano v. Boeing. “These types of
lawsuits are $20 million, $30 million, $40 million cases. These are material
figures for our clients. Insurance doesn’t always cover this,” Levine said.
“Many of these fee cases have been wins, but in reality the only people who win
are the attorneys.”

Asked what the threshold is for assets under
management (AUM) that would signal to a plan sponsor and adviser that they
should seek an institutional share class, Levine joked, “I’m on tape. I’m not
giving a number.” However, he continued, “Each situation is unique, and you
have to approach the decision much like the selection of a target-date fund
[TDF]. You have to understand the demographics of your work force. When do you
move out of a mutual fund to a separately managed account or a collective
investment trust [CIT]?” It’s all about vetting your decision with the right
questions and “documentation, to forestall litigation,” Levine said.

Retirement plan advisers would also be wise
to tactfully ask new sponsor clients how proactive they are prepared to be if
the adviser finds a problem with the plan.

On the enforcement side of the equation, “it
has been falsely reported that the DOL [Department of Labor] has hired
thousands of litigators,” Levine said. However, “they are looking at service
providers and fiduciaries like you. They have also become very sophisticated in
such things as looking at revenue sharing master agreements.”

As for the redefinition of what constitutes a
fiduciary, that change is not imminent, Levine said. However, advisers should
keep in mind that a broadened redefinition “could make it more difficult for
specialist retirement advisers to compete for business on the basis of taking
on fiduciary responsibility,” he said.

Advisers should also be cautious about
recommending individual retirement account (IRA) rollovers following the
“inflammatory GAO [Government Accountability Office] report that used
undercover callers to prove a potential bias by providers concerning rollover
advice.”

The Securities and Exchange Commission (SEC)
is now concentrating on auditing any firm that has been in existence for three
years without an audit, Levine said. His advice to prepare for this process: “Mock
audits are incredibly helpful.”